Tag Archive for UK bribery act

Integrity Due Diligence – Towards an integrated approach to Compliance (I)

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The serious impact and long-term effects of economic crimes, such as money laundering, corruption and fraud (‘MLFC’), may not seem to be as apparent as those resulting from hard security threats. These crimes do, however, pose some of the most menacing risks currently facing governments, institutions and corporations. The following article aims to discuss an integrated integrity due diligence approach to effectively combat MLFC on all levels of an organisation and across the relevant departments, whilst fulfilling regulatory requirements and ensuring the optimal protection of the institution’s reputation.

The article is divided into two parts. This first part will illuminate the background to the topic and introduce the most important legal frameworks. These legal requirements induce corporations and institutions to set up MLFC prevention structures. The second part of the article, to be published shortly, will outline how integrity and reputational due diligence in its various forms can be used to integrate MLFC prevention requirements more effectively and efficiently.

MLFC threats

The most clear-cut examples of the threats resulting from money laundering, fraud and corruption, are encapsulated in the impact of the 2007-2010 financial crisis, and most recently, in the ramifications of the European sovereign debt crisis, ultimately putting at risk individual state’s sovereignty and the overall stability of the European Union.  According to the World Bank, the global cross-border flow of criminal proceeds is estimated at between $1 trillion and $1.6 trillion per year, which amounts to some 1.5% – 2.5% of the world’s GDP.

Some large-scale investigations, into corruption, fraud and tax evasion – all of which are predicate offences to money laundering – have shaken corporations and catapulted the topic of MLFC onto the top of boardroom agendas, not least as a result of stringent compliance regulations. Given the growing number of requirements to combat MLFC, there is an increased interest amongst companies to improve standards and implementation procedures to ensure that they are effectively compliant.

Some of the most well-known money laundering cases include the US$ 7 billion of Russian capital flight which was laundered through the Bank of New York in the late 1990s or the billions of government assets laundered through the international banking system by the former Presidents of Nigeria, Sani Abacha, the Philipines’ Ferdinand Marcos and Peru’s Vladimiro Montesinos.  The most recent high-profile and currently still ongoing investigations, launched in 2011 into allegations of money laundering, involve the former leaders, toppled during the Arab Spring uprising: Zine El Abidine Ben Ali, Hosni Mubarak and Muammar Gaddafi.

The risks facing corporations as a result of corrupt practices have been drawn to the fore following some large-scale Foreign Corrupt Practices Act investigations launched by the US authorities into Statoil, Baker Hughes, Siemens, BAE Systems and Daimler. Due to the UK Bribery Act, which came into force recently, this investigative trend is likely to continue.

The legislative response

The subject matter of MLFC has received increased attention in recent years due to the precarious political implications emerging from these crimes. As a result, new legislation has been drafted and existing legislation expanded upon.  The following section outlines some of the most important conventions and legal frameworks, which have been enacted since the 1970s, and which have evolved over time.

Money Laundering

The fight against money laundering, with the aim of combating crime, was initiated by the Council of Europe in 1977. In the late 1980s, the US launched the so-called war against drugs followed by counter terrorist measures instated in the US Patriot Act in 2001. More recently, the fight against money laundering is also increasingly being supported by the international asset recovery initiative (‘StAR’), which was set up in 2007 by the UN Office on Drugs and Crime (UNODC) and World Bank, to assist developing countries in recovering stolen assets.

The Council of Europe Convention on Laundering Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism came into force in 2005.  The third European Union Anti-Money Laundering Directive, which has been implemented into national legislation within the EU member states, came into force in 2007, following the first directive in 1991 and the second in 2001.

The Financial Action Task Force on Money Laundering (‘FATF’), an intergovernmental body set up by the G-7 Summit in 1989 in response to mounting concern over money laundering, established a series of Recommendations (40+9) in 1990, which were revised in 1996 and in 2003.  The FATF also monitors progress of anti-money laundering implementation processes and publishes regular evaluation reports.

All anti-money laundering legislation, frameworks and guidance notes underline the requirement of undertaking Customer Due Diligence/KYC (‘Know Your Customer’) and of performing enhanced due diligence when engaging with high-risk clients. In turn, moving from regular to enhanced customer due diligence requires an adequate risk assessment process to be in place.

Within the context of the fight against money laundering, combating tax evasion is increasingly playing an important role. Governments continue to crack down on tax evasion in an attempt to reduce the amount of public debt. One of the most extensive pieces of recent legislation which aims to curtail tax evasion and repatriate funds to their respective home countries is the Foreign Account Tax Compliance Act (‘FATCA’) drafted by the US government, which will come into force in 2013.

Fraud

There is no single UN convention, which deals specifically with fraud, it is however, included in the UN conventions on money laundering and corruption, mentioned in this article. The implementation of fraud prevention systems have been driven largely by the Sarbanes Oxley Act (‘SOX’), which was enacted in 2002 following a series of large corporate and accounting scandals (Enron, Tyco and WorldCom), which resulted in the collapse of large corporations. The Sarbanes Oxley Act aims to improve corporate governance, quality of financial reports, and credibility of audit functions, and to deter fraudulent activities.  SOX requires that companies undertake third-party due diligence on their business partners and associates, to ensure that there are no issues of concern or ‘red-flags’ attached to their standing and reputation.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a voluntary private-sector organization, established in the United States, dedicated to providing guidance to executive management and governance entities on critical aspects of organizational governance, business ethics, internal control, enterprise risk management, fraud, and financial reporting. COSO was set up in 1985 to sponsor the National Commission on Fraudulent Financial Reporting, an independent private-sector initiative that studied the causal factors that can lead to fraudulent financial reporting.

Corruption

The Foreign Corrupt Practices Act (‘FCPA’) which was enacted in the United States in 1977 addresses accounting transparency requirements and the bribery of foreign officials.  The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions came into force in 1999 with the aim to reduce corruption in developing countries by encouraging sanctions against bribery in international business transactions carried out by companies based in the Convention member countries.  The United Nations Convention against Corruption, which was signed in 2003, focuses mainly on prevention but also addresses the issues of criminalisation, international cooperation, and asset recovery.  Most OECD countries apart from Japan, Germany, Ireland and the Czech Republic have ratified the UN convention.

In 2011 the most far-reaching piece of anti-corruption legislation, which is now considered the new gold standard for prosecuting corruption came into force, namely the UK Bribery Act.  Unlike the FCPA, the UK Bribery Act allows for prosecution of an individual or company, doing business with or through the UK, regardless of where the crime took place.  Furthermore, the UK Bribery Act not only refers to the bribing of foreign officials but to the bribing of or by anyone individual.  Finally, the Act does not allow for any facilitation payments.

Anti-corruption conventions and legislation also require corporations to ensure the integrity and reputation of the third parties linked to the company, and to conduct appropriate business partner due diligence in this regard.

Fragmented implementation

As can be seen from the legislative landscape outlined above, UN Conventions, respective legislation and best practices standards are somewhat fragmented, despite the fact that MLFC crimes are inextricably interconnected.  Although significant progress has been made in this area, also in terms of cross-border cooperation amongst institutions seeking to prevent MLFC, it is being increasingly agreed that MLFC initiatives and efforts need to be integrated more rigorously in order to ensure effective and efficient results.

Within institutions and corporations, it is often independent departments, which manage money laundering, fraud and corruption prevention efforts.  It is rarely the case, that one department is responsible for MLFC risks jointly. This might change in favor of more integrated structures, not only because it is more effective but also because it is the more cost efficient approach. The Association of Certified Anti-Money Laundering Professionals (‘ACAMS’) published a survey which showed how the majority of institutions expected to achieve improved efficiency in investigations by integrating their anti-money laundering and fraud programs, and that some 50% expected to see a reduction in the aggregate costs.

The US regulators, who have also made recommendations to institutions to integrate aspects of their anti-fraud and anti-money laundering programs, are also supporting this approach to integration. This drive for integration can also be seen on the level of the institutions setting and implementing best-practice standards in the area of MLFC.  Most recently, in July 2011, the anti-money laundering body FATF published a report entitled Laundering the Proceeds of Corruption and has made an official statement regarding its commitment to supporting the fight against corruption. In August 2011 the Wolfsberg Group, an association of eleven global banks focused on developing financial services industry standards, and related products, for ‘Know Your Customer’, ‘Anti-Money Laundering’ and ‘Counter Terrorist Financing’ policies, published the Wolfsberg Anti-Corruption Guidance, a revised, expanded and renamed version of their 2007 published Wolfsberg Statement against Corruption.

Integrity due diligence – an integrated approach

The second part of the article will elaborate on the integrity due diligence toolkit which contains the necessary instruments for assessing and managing risks attached to business partners and third parties in general.

Integrity due diligence can assist corporations and institutions in fulfilling the most fundamental operational aspects of combating money laundering, fraud and corruption. The integrity due diligence toolkit follows a risk-based approach and can therefore be tailored to meet any one organisation’s needs based on their risk exposure.

Jennifer Hanley-Giersch is Managing Director at Business Risk Research Ltd.

Analyzing the Role of Politically Exposed Persons in Tender Projects

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A major concern for a company getting engaged in a tender project in a foreign country is the opaque role that Politically Exposed Persons (PEPs) might play through the relationship between business and politics surrounding the project. This article builds on previous explorations of approaches to political risk research, and ties in with the recent analysis of the UK Bribery Act in this magazine. It suggests a strategic approach for dealing with PEPs, in particular political due diligence, relationship mapping and median analysis, particularly suited to dissecting formal and informal power networks.

PEPs defined

By definition, a PEP holds a public mandate, as member of a parliament, or a high-level public office as a member of the government or administration, including the military and the “security services” (so-called foreign public officials). Major shareholders and top directors of state-owned companies are also defined as PEPs. Moreover, private firms could be owned or directed by PEPs or their close relatives. Finally, so-called middlemen should be counted among PEPs, if they are closely related to senior politicians or a powerful party and use these contacts to broker business deals.

Political due diligence and relationship mapping

In order to protect a company’s business interests and reputation in a public tender process, a strategic due diligence procedure would include investigating the potential risks attached to key PEPs. The political due diligence method applied by the Berlin Risk Institute in partnership with Business Risk Research, includes the following systematic steps:

STEP 1: Identifying all PEPs with a stake in the tendered project, and understanding their political affiliations and corporate interests.
Goal: Analyzing and visualizing a  “relationship map” which displays the relevant political connections and channels of PEP influence affecting the tendered project.

STEP 2: Analyzing key PEPs’ reputation in the media and searching for negative issues related to them in the past, as well as new potential conflicts of interest, given their placement in the relationship map.
Goal: Identifying issues of corruption and bribery, patronage, nepotism and clientelism, and discriminatory/preferential treatment of domestic or foreign competitors to which the PEPs might be connected.

STEP 3: Determining critical PEPs’ motivation, based on the enhanced analysis of their resources, positions and salience regarding the project concerned.
Goal: Monitoring and forecasting the strategic and dynamic behavior of PEPs.

Network and median analysis

In the context of a public tender project in a foreign country, PEPs are insofar relevant as they might distort the fair competition between the bidders. Two risks are of particular concern: corruption and discrimination. Firstly, a PEP may ask for financial or other valuable favors in order to politically promote a tender proposal (or refrain from blocking it). Secondly, a PEP might have vested business interest in opposing a foreign provider and could use his political yield to the advantage of a competitor.

In order to manage these political risks originating from PEPs, the political and business environment of the tender project needs to be mapped out. Depending on the assignment, the research and analysis will have to extend into both the vertical and the horizontal dimension. Vertically, the relationship network of concern might include individuals on different political levels, reaching from the central governmental down to the local political and administrative level. Horizontally, the power basis of critical PEPs might be both diverse and clandestine; therefore, research needs to explore the hidden and indirect relationship channels through which a detrimental influence might be exerted.

The goal of such a vertically and horizontally thorough network analysis is to identify and profile the relationships of those PEPs who are of central importance with respect to the tender project. However, the involvement of PEPs is of a dynamic and strategic kind, which requires a further analytical step.

Strategic median analysis was originally developed for predicting the likely outcome of competitive situations.  In the context of a public tender it can be used to discern under which power constellation a company might be awarded the project in question. Strategic median analysis combines the assessment of interests with the profiling of the motivations of powerful stakeholders. While interests are rather static, the motivations of PEPs to act in a certain way might change depending on their resources, their relative preferences and the importance they attach to the issues concerned (see above Step 3).

Combining political network and median analysis is the most advanced method for undertaking a strategic due diligence assignment. Both analytical methods can be supported by sophisticated technical tools as well as graphical visualization suited to highlight the risks in an ever so complex setting.

The UK Bribery Act and the Call for Integrity Due Diligence

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The United Kingdom Bribery Act 2010 that came into effect on July 1, 2011, marks a new development in extraterritorial jurisdiction in the context of the worldwide campaign against corruption. This article aims to explore, in how far foreign companies are affected by the Bribery Act and what they can do in order to avoid prosecution in the UK.

The global reach of the Bribery Act

The Bribery Act will allow the Serious Fraud Office (SFO) to prosecute both UK and foreign companies for acts of bribery committed anywhere in the world, provided they “carry on a business” in the UK (section 7-5). What that exactly means is not entirely clear yet. Different from the impression given in the “Guidance about procedures which relevant commercial organisations can put into place to prevent persons associated with them from bribing”, published by the Ministry of Justice, a business presence might not be confined to entertaining an office, warehouse, manufacturing facility in the UK.

In a recent interview, the Director of the SFO, Richard Alderman, made it clear that even foreign companies that are listed on the London Stock Exchange, would fall under the jurisdiction of the Bribery Act. This matter will have to be decided by the courts. Alderman also noted that his approach will not be going for the “low-hanging fruit” of smaller companies, but targeting difficult cases and larger companies, referring to the necessary public interest in prosecution.

Given the uncertainty attached to the future implementation of the Bribery Act, foreign companies are well advised to make sure that they comply with what is widely perceived as the toughest anti-corruption law to date. Companies that prefer to be on the safe side, need to establish risk-based integrity due diligence procedures in order to prove that they were taking appropriate preventive measures against bribery.

The following sections will  show how serious the Act’s provisions are, and what kind of due diligence requirements result form these provisions.

The main provisions

The Bribery Act is set in the context of international anti-corruption instruments including the UN Convention against Corruption and the OECD Convention on Combating Bribery of Foreign Public Officials, and it goes even further than the already far-reaching US Foreign Corrupt Practices Act (FCPA).

The Bribery Act creates “offences” of offering or receiving bribes (active and passive bribery), bribery of foreign public officials, and of failure to prevent a bribe being paid on an organization’s behalf (sections 1, 6, 7).  Therefore, executives are now also fully liable for not preventing acts of bribery committed by individuals associated with their company. An associated person is anybody who “performs services” for and on behalf of the company (section 8). The implications of this extension beyond a company’s employees are considerable, since associated persons can be business partners and subsidiaries, middle-men and local agents, but also suppliers who perform services in the defined sense.

Violators of the Bribery Act face up ten years imprisonment and unlimited fines, which also marks a new quality. Despite some recent debates, the Bribery Act also remains particularly tough on so-called “facilitation payments”. Such bribes to foreign public officials intended to facilitate government action and services that would normally be routine, are illegal according to the Bribery Act. Unlike under the FCPA, no exemptions are made, in order to not compromise the general objective of eradicating the practice of facilitation payments.

Together with the clauses on associated persons, the taboo of facilitation payments ultimately requires executives and directors to oversee a tight system of compliance procedures, which also expands to all their contractors. As a consequence, contractors will also have to put in place proper anti-bribery measures, in order to ensure that they pose no risk to the larger company with which they are associated.

Risk-based integrity due diligence

According to the Bribery Act, it is a “defence” for a commercial organization “to prove that it had in place adequate procedures designed to prevent persons associated” with it from undertaking acts of bribery (section 7-2). A single case of bribery, therefore, will not necessarily trigger a prosecution by the SFO if the company does have a robust compliance regime in place. Establishing enhanced integrity due diligence on associated persons will signal a strong top-level commitment to the incorporation of anti-bribery measures into a company’s risk management culture.

Integrity due diligence regarding the trustworthiness and reliability of business partners and politically exposed persons in foreign countries, should already be common practice for those companies that are keen to protect their public reputation. In that sense, the Bribery Act adds an additional incentive for companies to revise their compliance practices when investing abroad.

The requirement of adequate procedures essentially means pursuing a risk-based approach in operationalizing the integrity due diligence process. The procedures should be proportionate to the risks faced by an organization, given that the Ministry of Justice, in its Guidance, does recognize that the bribery risks threatening a commercial organization vary across jurisdictions, business sectors, business partners and transactions.

The bribery risk assessment would certainly include country risks, considering the different levels of corruption, anti-bribery legislation and transparent policies in host countries. Likewise, sector risks will usually be higher within extractive industries, or with regard to telecommunication and infrastructure projects which are subject to public tender processes. Relationships which involve a higher risk include intermediaries used in transactions with foreign public officials, consortia and joint venture partners, or business relationships with politically exposed persons (so-called PEPs), identical with or closely linked to a prominent public official.

In higher risk situations, conducting enhanced integrity due diligence on associated persons and proposed partners is the only way of mitigating bribery risks. Since a company’s senior officials are liable for the actions undertaken by their local intermediaries to enable the development of business in foreign countries, these individuals need to be subject to an integrity check. This also applies to relationships that are established by companies engaging in merger and acquisition projects. Particularly sensitive is any involvement in privatization processes in foreign countries, which entail partnership risks attached to the often close business-politics-nexus.

A state of the art integrity due diligence will comprise research on an associated person’s reputation and background, and, where necessary, targeted enquiries into individual networks and practices, in order to inform a company about the bribery risks attached to their partners. It also appears that the Bribery Act requires continued monitoring and reviewing of the integrity of persons associated with the company.

The effort of ensuring compliance with the Bribery Act by implementing adequate integrity due diligence procedures is certainly worthwhile in order to ensure solid risk management and good governance practices. An adequate risk-based due diligence process will also be acknowledged by the Serious Fraud Office.